Check out a lively discussion of how agencies are coping with the new data-driven landscape, driven by marketer’s increasing ownership of their own data. Featuring L’Oreal, Mediavest | Spark, and Krux. Brought to you by Econsultancy.

Much has been written about the notorious “logo vomit” map of famed internet banker Terence Kawaja. I reference his handy charts on my blog, and often his “Display LUMAscape” as a reference point for thinking about the digital display business, and what will happen to it. Many have tried to navigate through the various categories and dissect what may be “happening” in the space, which is a favorite pastime of company executives trying to raise money for many of the identified advertising technology outfits referenced within. Nobody ever really tries to explain the whole thing, though. It’s just too complicated, I guess. Allow me to try:

“A few years ago, people started to figure out that you could use technology to target advertising to people on the Web. Ever since then, 250 companies have placed themselves in the middle of the transaction between the advertiser and the inventory, confusing everyone. Now, most of them are running out of money and will sell cheap, get acquired, or go out of business.”

Perhaps that oversimplifies things slightly, but the reality is that there are many companies in the space that are primed for one of those three scenarios. Unfortunately, most of them will sell for less than their investment, or go out of business. Here are the three big reasons we have gotten here:

It was a Bad Idea

The whole point of most of the companies on the Kawaja map is to help advertisers use data to find exactly the right audience at the right time, serve them the right ad, and maybe find something out about them that helps drive branding or sales. In the past, most advertisers used to do that contextually (putting ads for shoes in Vogue, for example) and it seemed to work pretty well. When that Internet thing came along, publishers could get something nearing their print CPMs for “site sponsorships” and premium banner advertising alongside good content. Sooner or later, however, publishers decided to put banners ads on all of their pages, creating the advertising largest inventory glut known to man. That created a big problem.

All of that banner space needed to be monetized somehow, and publishers were quickly discovering that it was hard to make money on the trillions of monthly advertising impressions they had created. But nobody wanted to buy $10 CPM banner ads on message board pages, and the “contact us” page. So, in order to “solve” this problem, exchanges popped up and allowed publishers to “monetize” this space by having various parties bid on the inventory. Things got even better when data companies came in, and were able to layer some demographic data atop those impressions, making audience buying possible for the first time. The venture money flowed, as smart young technologists created fast-moving software companies to help marketers exploit this trend as they sought a way to help reduce industry average CPMs from $20 to $2.

Mission accomplished! In the last 10 years, average CPMs have been drastically reduced, 100% of a publishers inventory is being “monetized” (often by 10 or more companies), and you can target an ad down to one’s shoe size. So, what’s the problem? Hasn’t turning advertising from an art into a science worked?

The answer is: Yes, but not for all of the companies on that map. People visit three sites a day, and one of them is Facebook. If you want audience targeting, why not just find exactly what you want from a social network? They are the ones with the real audience data. They are also the ones with the audience scale, having about 5 times as many “profiles” as the next largest data company. The problem with all the companies trying to sell you audience targeting and ad technology is that it only works when you have audience scale (they don’t) and deep audience data (they don’t have that either).

Facebook, Google, and LinkedIn (and the next company that people are willing to share their private information with) are going to win the audience targeting game. When you are talking about audience buying at scale, social media IS digital media.

It’s Still about Art

If you believe that the average web user visits only two sites a day besides Facebook, then you better find them on those sites—and give them a really amazing experience with your banner ad. That thing should play video, games, talk to you, and almost pay you to look at it. Since only three out of every 10,000 people will click on it, you had better make sure the creative really tells a terrific story and gets your brand message across too.

That means standard sized banners that work with exchange-based buying are pretty much irrelevant, since they have a hard time doing any of the above. It also means that context has to accompany placement. It is not enough to reach a “35 year old woman in-market for shoes.” You have to reach her when she is on her favorite fashion site, or otherwise psychologically engaged in shoe consideration. The ad should be in a brand-safe environment that engenders trust—and compliments the creative in question. That sounds suspiciously like premium display advertising…the stuff that was being sold 10 years ago!

In a certain sense, we have almost come back full-circle to guaranteed, premium advertising. And that means an emphasis on the creative itself. If you look at the map, it’s clear that creative isn’t a part of the picture…but it might be the most important thing driving the future of the digital display advertising business.

It’s Confusing

Even if agencies and advertisers wanted to take advantage of a few of the of companies cluttering the “landscape,” they would need to log into and learn multiple systems. As a marketer looking to reach women, am I really going to log into Blue Kai and bid on demographic “stamps” from Nielsen, log into AppNexus and apply those to a real-time exchange buy, constantly log into my DART account to check ad pacing and performance, periodically log into my Aperture account to download audience data, and then log into my Advantage account every month to bill my clients? Maybe—but that’s exactly the reason why digital media agencies are making 3% margins lately. Most of these technologies are really great on their own, but string together too many of them and you start to get lost in the data, and are unable to react to it.

For digital marketing to be effective, a set of standards need to be created that enables systems to work together and share information. Basic B-school dogma teaches you that effectiveness starts to break down when a manager has more than 5 direct reports. If you believe that, then it’s not hard to imagine the effectiveness of a 22-year old media planner managing 5 logins on behalf of his agency. It’s not just confusing, but impossible.

We have built an industry ripe for aggregation, and the Googles, Adobes, and IBMs of the world will not disappoint us! So, what companies will succeed in this ecosystem?

— Social Scalers: If you agree that all reach advertising targeting audiences will eventually be on social networks, then you should look to work with companies that are making social advertising scale effectively. Doing Facebook advertising is incredibly easy—but doing it right is hard. Doing it properly requires extreme multivariate creative optimization and, more importantly, knowing what to do with the mounds of truly actionable audience data that Facebook and other social networks will hand you. Companies like XA.net that are doing this are EPIC WIN.

— Creative enablers: Since the conversation is coming back to the creative, how can technology help make great creative even better—and help advertisers understand how that creative is being engaged with? The click is a dead metric to most seasoned advertisers, who are spending more time with branding measurement tools (Vizu) and creative ad analytics startups (Moat) that are well positioned to “science-ify” the truly important part of advertising: the creative itself. Companies doing that well are also going to be EPIC WIN.

— Standard Bearers: With all of the logins out there, it is inevitable that one company is going to try and create the technology stack for next generation media buying that puts all the pieces together seamlessly. There are a number of companies trying to do this right now (full disclosure: I work for one of them), and I believe there will be a lot of advertisers and agencies relieved to log into a single platform, and be able to access all of their vendor relationships in one dashboard. This will take some time, but the companies that enable standardization across technology providers will also WIN big.

Media buying desks are so 2009. I mean, who doesn’t have access to 800+ exchange inventory sources and 30 different 3rd party data providers? In a world where well-heeled demand side customers have all of the tools to buy audience efficiently, how do internet marketers effectively communicate?

At this moment in time, digital display advertisers love the idea of audience buying because it seems unique. The concept of buying an audience, rather than the site it is on, is truly revolutionary and will be a continuing part of the digital media conversation for a long time to come. However, many technology companies are being funded, started, and run on the foolish misconception that audience buying vs. site-specific buying is a binary choice. It is not. Large holding company shops are trying to migrate client budgets over to their media buying desks, demand side platforms are trying to displace ad networks, and ad “platforms” are attempting to skim the media cream on all real time transactions by promising better performance through centralization. All of these tactics are doomed to fail.

Context

Unless you are going cheap and deep by buying remnant inventory at under $0.50 CPMs—or going data-heavy and spending upwards of $5.00 CPMs using segmentation to find highly specific premium audience—you are going to need context. In the former case (running wild with sub-$0.50 bids across exchanges) you face the issue of low CTR and the accompanying issue of low brand safety. Your ad is getting out there, but God knows where it’s serving. Then again, at $0.50, why not “spray and pray?” With machine learning, you can easily optimize against a conversion pixel, and let your bidding technology find all the performance that a cheap CPM can yield.

On the other end of the spectrum (using expensive V12 or Bizo segments, for example), you have a highly targeted audience—but a problem achieving scale against such specific targeting goals. Also, while you may be hitting your desired segment, you may be hitting them at the wrong time. As a frequent traveler, I have been frequently targeted with exactly the right ad (Cheap JetBlue flight to SFO) at exactly the wrong time (during my Yahoo! fantasy baseball draft). Context does matter. Reaching premium surfers when they are engaged in consuming premium content is still relevant. That’s why people pay what they do for full page ads on the Wall Street Journal and that’s why WebMD will never accept “3rd party” advertising. Context matters, intent matters, and a user’s mindframe matters. When I am reading an article about Carmelo Anthony on ESPN.com, and I am in the market for basketball sneakers, I am simply more likely to buy them…because I am in a basketball mindset. Catch me with the same sneaker ad when I am replying to my friend on Hotmail, and it’s highly unlikely that I will break task and respond.

Engagement Methodology

Almost as important as context, is the way that an ad is served. The majority of online audiences visit about three sites a day—and one of them is Facebook. It’s kind of tough to get into the media mix for the average site. There are two approaches the modern digital publisher can take can deal with this reality. The first is to SEO the hell out of their site, and drop enough tags to ensure an automatic, steady flow of exchange and network advertising. Another method is to firewall their exclusive content and only serve guaranteed advertising. Hybrid models are the norm, but publishers must manage the inevitable channel conflict and data leakage that come from opening up premium ad slots to networks and exchanges. Getting this blend right for websites is step one.

Modern publishers also have to go beyond the website. Today’s publishers are not only offering a blended approach to solving these marketing needs in modern RFPs—they are going beyond the typical RFP response to craft unique digital offerings that reach users that are engaged with digital content on multiple screens. You can’t effectively target pure audience yet on iPads, iPhones, or Android devices. Buy that’s where a lot of content consumption is rapidly shifting, Companies like Phluant (adapting online rich media ads of mobile browsing) are on the forefront of adapting display advertising to the new, mobile environment where they will be seen.

If your development plans do not include interoperability with the multiscreen media world we live in currently, then you are already becoming irrelevant. In the near future, there will be no such thing as “mobile networks” and “in-app” advertising. There will be platform solutions which enable cross-platform messaging (and accompanying analytics) in real time.

Price

A lot of the biggest mistakes modern media buyers make can be attributed to pricing. Todays’ digital media options do not lend themselves to a single RFP, with a static pricing range. The typical marketer looking to find high-income middle-age men who are “auto-intenders” may top out at $12 CPM. This is ridiculous. Marketers (especially old school direct mail marketers), know the value of finding their exact audience may be in the $100 CPM range (if they know they are reaching that exact, qualified customer), or it may be in the $1.00 CPM range (if they simply want to blanket my message to “men” in certain geotargeted area). Audiences are variable—but buying methodologies are not. In the near future, media buying will become programmatic, enabling marketers to populate a more robust RFP template with data—and receive systematic buying templates that span both buying methodologies (guaranteed and real-time) and pricing methodologies as well (CPM, CPC, CPA).

Choice

Today’s world is about choice. The modern digital marketer doesn’t have to face the straw man argument between choosing guaranteed vs. real-time audience buying; neither should he make the false choice of deciding between rich media and standard banners, when both can be deployed seamlessly across a single campaign. Moreover, it is now simple to leverage broadcast creative digitally, and run video advertising units on television, on the web, and on mobile devices simultaneously. As technology rapidly enables interplatform operability, marketers will be able to focus more upon the (all important) creative, than the delivery methodology itself.

As digital delivery systems evolve, marketers will live or die by the power of their creative to captivate. When technology companies finally enable marketers to broadcast their advertising across multiple digital channels at once (online display, video, mobile, DOOH, and cable set-top), the challenge will once again turn to creativity. In a technology-driven media world that enables marketers to produce and stream an advertising message seamlessly into the ether—it’s all about the ad, rather than where it is seen.

Up until now, the conversation in the space has been about delivering ads (by “DSPs” and RTB systems). As digital advertising delivery systems evolve, and every marketer has near ubiquitous access to platforms that enable scale and cross-platform delivery, the conversation is going to shift back to who is producing the best creative.

With all the new technology and access to data, you would think running a digital agency in 2011 would be tempting. After speaking with a few hundred digital agency principals over the last several years, I think I would rather work at a car wash. At least you are outdoors doing low-value repetitive tasks. Let me explain.

I think most digital agencies were started by really smart people who saw the opportunity to provide their clients with the “magic” of media. Interactive ads, true measurement, real user engagement, ROI, and cross-platform messaging that reached consumers where brands wanted to be found. That is still true. The early ones nurtured their accounts from direct mail to e-mail, and then from broadcast into the web, a little budget at a time. When digital media truly arrived, digital agencies were at the vanguard of a new era: technology-driven creative shops and data-driven media agencies that crammed brand messages into the 728×90 mini billboards we love to hate, but occasionally produced some real internet marketing magic.

After a while, the magic was gone.

Digital campaigns have a tendency to suck every penny of margin out of an agency. The client wants to serve rich media, but doesn’t want to pay for it. They have $50,000 to spend but they want 10 A-tier sites on a plan, all of which have a $25,000 minimum. They want to run 5 creatives per placement, and switch them every two days, based on performance. They need their ads pixeled, and hooked up to their Google Analytics platform, which reports traffic numbers that never match up with their ad server. Then they want to know why. Most importantly, they want to be billed correctly, and that means making demand-side and publisher-side ad servers talk together, and agree on impression amounts (which, from my experience over the last 15 years, has never happened once). That’s an awful lot of work.

That’s why (as the 4As reports), digital margins can be 10 times lower than the margins on traditional media campaigns. That’s called mucho trabajo, poco dinero. Since digital agencies don’t seem to be going away anytime soon, they are going to have to figure out how to make more margins from their business, rather than leverage the traditional agency model of overworking extremely young employees until they burn out (essentially, the mucho trabajo, poco dinero cheap labor model). Here are a few things the modern digital shop must embrace for long term success:

1) Use a Platform (or two): I paraphrase from David Kenny’s remarkable keynote address at the OMMA 2010, “if you are still using people to do work that servers can do, you are already irrelevant.” What value is there in providing ad operations for your clients (none, they just want their ads to work properly). How about reconciling and billing against different delivery numbers? Again, how does that provide value for your client? Those are low-value tasks that must be accomplished, but things that don’t make you a better agency for your clients. There are many systems out there that can centralize these low-value tasks (ad trafficking, billing reconciliation, reporting, etc) so your agency can focus on your clients.

2) Hire some Nerds: I’m talking about math nerds. Media used to be about finding audience based on panel-based surveys. Now, media is about finding audience by using data, and then using performance and audience measurement data to perfect that audience—and using quantitative analytics to bid on that audience and optimize your results. Since media seems to be about understanding and leveraging data, you are going to need a few people who speak the language. They aren’t the same old English majors from liberal arts colleges in the northeast, either. And the good ones are expensive.

3) Be Strategic: This sounds obvious, but sometimes the definition of “strategic” gets lost in the weeds when it comes to digital. Sometimes, an agency feels it is being “strategic” when they partner with enough technology companies that offer their clients a variety of digital tactics (social, video, mobile). But having those partnerships and capabilities is far different than using them smartly, in a way that gives your shop the edge over your competition (they have access to all the same technology as you do). True strategy involves finding what works for your clients and creating repeatable processes that lead to long term success. When your clients say they “want to do social” are you smart enough to determine whether they simply need access the Facebook API—or are they looking to find their customers through conversational density around their products, such as Buzz Logic offers? How you offer “social” to your clients should come with its own, unique strategic model.

4) Partner: Agencies are really just an extension of their clients, and they should operate that way. Now, we are seeing agencies building their own technology to leverage media buying power (and even earning commissions from inventory sources), and acting a lot like technology and media companies. I’m not sure (at least for media agencies) this is sustainable. Building great creative that drives forward brands (whether through sales, or just audience exposure) is key—and finding new audience to interact with those brands in the new multiple screen world is where the core competency of today’s digital agency should be. Let the technologists build the technology. They are happy to let you use it, and willing to partner (with both their technology and people) to share success.

Looking around at all the different technology available to digital agencies these days, we aren’t far away from when starting an effective campaign, building amazing creative, deploying it to the exact audience you need, measuring it, optimizing it, and billing it will be as simple as….well, doing it on Facebook. That means that, once you and every other agency begin to avail yourself of that technology, you better be left with something unique to sell your clients.